Lack of money, profit and cash flow sucks; it’s stressful, frustrating and sometimes embarrassing. Particularly if you are working long hours with nothing to show for it. The good news is that it doesn’t have to stay that way … really.
The first step is to identify the true problem. Is it a profitability problem, a cash flow problem or both?
Most business owners believe they just need more sales to fix things and this is rarely the right answer. Firstly you need to understand if you are profitable and secondly know how well you are doing at turning profits into cash.
We Need to be More Profitable
Profit is just the difference between revenue and costs. So all we have to do is increase revenue and/or decrease costs. If only it were that simple!
Well it almost is. You have variable costs (Cost of Goods Sold – that are incurred when you make a sale) and you have fixed costs (overheads – incurred regardless of making sales).
These two costs must align for your business model. Are you making money when you make a sale? (decent margins) and/or “Are your overheads as low as they can go without compromising business?” If they are, then more sales is the answer (look for my article next issue on this). If not, then getting these numbers in line is your first task.
Account for your own time too when factoring your margins.
We Are Profitable But Consistently Short on Cash
This is actually good news because there are a number of simple strategies we can use to quickly change this. Here are the main causes for poor cash flow that you need to look into:
- Paying for inventory (or labour) before being paid by customers (Negative Cash Cycle)
- Poor inventory management (stuff in stock for too long)
- Poor accounts receivable management (not collecting fast enough)
- Paying bills too early
- Paying off debt principle
- Investment in assets (buying stuff)
- Owners taking too much cash out of the business
To improve cash flow in a profitable company, it would be common to adjust several of these.
Management of costs, effective pricing and cash flow management are some of the least sexy parts of running a business. But they are the absolute lifeblood. Without a good handle on your numbers, you are like a ship without a rudder; no ability to steer and react to get you to your destination. On my website I have some free videos about understanding your numbers (www.jamiecunningham.com/free_videos). If this is not a strong area for you, invest the time to educate yourself.
There is a very strong correlation between financial literacy of the business owner and profitability. Until next time, happy counting.